Global M&A market says ‘welcome back’ to confidence

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KPMG International’s latest Global M&A Predictor shows that the confidence to undertake significant M&A is predicted to return to the world’s largest companies, according to the latest analyst predictions, with global forward P/E ratios rising 15 per cent over the past six months and 12 per cent year-on-year.

Not only do companies appear to have their appetite back, but they also have the capacity to transact, which is indicated by the forecast net debt to EBITDA ratio, which shows an expected improvement of 15 per cent over the next year. Over the last two years, the trend has been for steadily rising capacity – driven by companies’ focus on reducing debt – to be tempered by an equally steady decline in confidence.

However, the tides seem to be finally turning as over the past six months global confidence is actually rising to match capacity. In comparison with June 2012, the difference in appetite is dramatic. In the previous edition of KPMG International’s M&A Predictor, analyst predictions showed that appetite levels for M&A were falling across the board. In other words - confidence was dropping everywhere. At the end of 2012, confidence is rising in almost every country covered by the data.

Tom Franks, global head of corporate finance at KPMG International and a partner in the UK firm, says: “The outlook for 2013 is more positive than it has been for over 2 years and undeniably this is a winning combination for the health of the global M&A market. Companies are ready to throw off the shackles of austerity in the hunt for new opportunities.”

The Predictor is also telling us that confidence is up across all sectors, as the overall macroeconomic picture becomes more stable again.

Franks adds: “The US elections are over, the ‘fiscal cliff’ crisis has been averted or at least deferred, and China has begun the transition to a new leadership team so we can now see that there is more certainty than there was 6 months ago, and that is feeding through into transactional confidence and capacity levels.”

Although appetite in healthcare only rose by a modest 11 per cent in the past 6 months, it saw a significant expected increase in capacity over the next year of 40 per cent. It was a similar story in technology, where a nine per cent rise in appetite – albeit a healthy increase but below average – was outshone by an expected 32 per cent increase in capacity. Industrials saw appetite rise by 22 per cent and capacity by 16 per cent. Basic materials were another success story with a 16 per cent rise in capacity and a 37 per cent jump in appetite.

Andy Cox, head of transaction services at KPMG in the UK, says: “The uptick in appetite in the data chimes with our own experience on the ground, where we are seeing a number of big sell-side opportunities, particularly in consumer goods. According to the data, consumer markets have the second largest appetite for deals and indeed the sector has been very active in the last year with big ticket examples such as the United Biscuits/ KP Snacks (GBP500m), Weetabix/Bright Foods (GBP1.2bn) and AG Barr/Britvic (GBP1.5bn) deals. With many large consumer goods companies spinning off non-core business lines or seeking to tap into new high growth markets, we expect to see plenty more deals this year.

“The data also shows that the greatest appetite for deal-making is in basic materials and certainly the biggest deal in the market is in this sector. However, the return of bullish confidence should be tempered by news that regulatory uncertainty is delaying deal completions; not just in basic materials but also in the consumer goods sector. Dealmakers have to think very carefully about the regulatory environment and be prepared to invest time in meeting international regulators’ requirements.”

Despite ongoing troubles in the Eurozone, European companies are looking particularly confident, with forward P/E ratios (measuring appetite) up 19 per cent on June 2012 and up 16 per cent over 12 months. European forecast net debt to EBITDA ratios are similarly positive, showing an increase in capacity of 12 per cent over the next year as companies capitalize on the low interest rate environment to pay down debt.

Looking at the country level, although there are understandably considerable variations between markets, the overall trends for confidence and capacity are both overwhelmingly positive. Germany is a good example with an appetite increase of 26 per cent since June 2012 and a forecast capacity rise of 20 per cent. Similarly, in the US, appetite increased by 10 per cent and capacity by 21 per cent. Even the UK, after the gloom of a double dip recession, matches the global confidence figure at a healthy 15 per cent, with expected capacity rising by 11 per cent.

Franks says: “The latest edition of the Predictor tells us that after a prolonged period of negativity things are moving in the right direction for the M&A market. Without a doubt, the next six months should be even more interesting to watch.”